By Taiga Uranaka
TOKYO (Reuters) - Japanese lenders are rushing to cut deposit rates before the start of the Bank of Japan's negative interest rates on Tuesday, following sharp falls in benchmark bond yields.
Sumitomo Mitsui Banking Corp said it cut the interest rate on ordinary deposits to 0.001 percent a year, from 0.02 percent, the bank's first reduction on ordinary deposits since September 2010.
The rate, effective from Tuesday, means a depositor will be paid an annual interest of 100 yen ($0.88) on 10 million yen ($88,000).
The bank, a core unit of Japan's third-largest lender Sumitomo Mitsui Financial Group (T:8316), and its biggest rivals Bank of Tokyo-Mitsubishi UFJ (BTMU) (T:8306) and Mizuho Bank (T:8411) have already cut rates on time deposits, though those remain in positive territory.
But bank executives said further cuts in loan interest rates are unlikely to give a boost to loan demand.
"Our corporate clients are saying the BOJ's negative interest rates won't lead to an increase in capital spending," said a senior executive at one of the megabanks.
"With global markets this volatile, they are taking wait-and-see stance. One client told me his company is even putting a project on hold to rebuild its own office building," said the person, who declined to be identified given the sensitivity of the matter.
"On a macro level, businesses and households have surplus funds. Further falls in interest rates are unlikely to lead to a surge in loan demand," said Ryoji Yoshizawa, director at Standard & Poor's in Tokyo.
Simply put, banks make money from the gap between what they pay for deposits and what they receive from loans.
The Bank of Japan unexpectedly cut a benchmark interest rate below zero late last month -- effectively charging financial institutions which park money with it -- as it struggles to the stimulate the economy.
But even before the introduction of negative interest rates, banks have little more room to cut deposit rates, while loan interest rates are likely to fall further amid tepid demand.
Bank officials said it is difficult to charge fees or negative interest rates on clients' deposits given a possible public backlash. A massive withdrawal of cash from the banking system is also a possibility.
Short of such measures, major banks are asking some large big corporate clients to refrain from making large deposits at their banks, people with direct knowledge of the matter said.
A senior money manager at a major life insurer said his company has a large vault in the basement for keeping important documents.
"Half jokingly, my colleagues and I checked how much cash it could hold, if necessary," said the person, who was not authorised to discuss the matter publicly.
"As it turned out, it could hold only several billion yen (several tens of millions of dollars)."